Standard & Poor’s has removed Luzerne County government from a “credit watch” list but did not reverse a credit rating downgrade the agency imposed in November.
The agency had lowered the county’s financial position two notches from investment grade to a speculative BB+, which is labeled as “junk” by some in the investment world.
Standard & Poor’s had cited its “worsening view” of county management and the county’s “political gridlock” and criticized both the administration for failing to sufficiently monitor county finances and the council for initially rejecting a $20 million loan during the 2015 state budget impasse to guarantee a county debt repayment would be met.
Acting county Manager C. David Pedri sent the new 2016 credit profile report to council members Tuesday, saying he was “pleased to report” the county’s removal from credit watch status.
“In addition, Standard & Poor’s specifically recognized that budget practices have improved under the home rule form of government,” Pedri told the council in an email.
Pedri acknowledge the county “still has significant work to do” to return to investment-grade status.
He also stressed Standard and Poor’s lumps both the executive and legislative branches under the general term “county management” in its report.
“Numerous times in this report, Standard & Poor’s specifically referenced ‘political gridlock’ in its assessment. On behalf of the executive branch, I pledge to work with the county council to secure better financial stability,” Pedri said.
According to the new Standard & Poor’s report:
The agency removed the county from credit watch status because the county has “remedied” its short-term concerns about honoring debt repayments.
However, the agency kept the county’s “negative outlook” assignment because the county has no reserve cushion to weather future “fiscal pressure,” such as potential additional delays in state funding.
The agency said “political instability and gridlock” has weakened the county’s financial position and operations.
It points to the council’s adopted 2016 budget, which was “largely divergent from what was proposed by management” and demonstrates a “lack of willingness to meaningfully replenish its reserves.” This budget also relies on non-recurring revenue, such as savings from a 2015 debt restructuring, to fund ongoing operating expenses, the agency said.
Prior county manager Robert Lawton, who resigned at the end of 2015, had proposed an 8-percent tax hike to reduce the county’s $16.9 million deficit to $5.4 million in a quest to start creating a positive cash reserve.
Instead, a council majority passed a $130 million operating budget that kept real estate taxes the same and was estimated to shrink the deficit to about $13.5 million.
An accurate assessment of the deficit won’t be available until the 2015 county audit is completed.
Standard & Poor’s also noted a change in management with the departure of Lawton and the election of three new county council members.
The agency’s view of county management will “likely remain very weak” unless the county enacts “significant structural reforms” or a “structurally sound 2017 budget,” it said.
It credited the county for improved budget practices since the January 2012 shift to home rule government, saying the council receives regular budget updates throughout the year. However, it questioned the “usefulness” of such monitoring if the county is unable to respond to “imbalances,” such as delays in receiving state funding.
The agency advised county officials to implement recommendations in a five-year financial recovery plan prepared last year by Public Financial Management.
“In our opinion, while a plan exists, we question management’s ability to adopt such reforms given recent turnover and gridlock,” it said.
